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Corporate Finance : Mergers & Acquisitions

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International financial institutions and regional investors are shelling out billions of dollars for stakes in China’s largest banks. With a booming economy and an enticing $1.5 trillion in personal savings, China has become an attraction for global bankers ahead of the full opening of its financial system to foreign competition late next year.

While the Western bankers characterize their investments as strategic partnerships, most are demanding guarantees that they won’t find any skeletons in the vaults of the Chinese institutions, which have disposed of mountains of non-performing loans.

Singapore’s state investment agency, Temasek, which already has profitable bank investments in Indonesia, South Korea and India, is making some of the biggest bets on the future of China’s banking industry. Temasek, which is headed by Ho Ching, the wife of Singapore Prime Minister Lee Hsien Loong, agreed on August 31 to acquire a 10% stake in Bank of China for $3.1 billion. Temasek also is expected to spend $2.5 billion for a 10% stake in China Construction Bank. Earlier this year, the Singapore agency purchased a 5% stake in Minsheng Banking, one of China’s few privately owned banks.

Also in August, an investor group consisting of Royal Bank of Scotland, Merrill Lynch and Li Ka Shing Foundation agreed to acquire a 10% stake in Bank of China for $3.1 billion. Hong Kong-based billionaire Li Ka-shing is chairman of Cheung Kong and Hutchison Whampoa. Royal Bank of Scotland said it would invest $1.6 billion itself, giving it a stake of 5%, but that it would control the entire 10% stake on behalf of its co-investors. Fred Goodwin, CEO of the Edinburgh-based bank, says RBS received “appropriate warranties and protections” that would safeguard investors. “The deal that we have announced, from Royal Bank’s perspective, is low risk,” Goodwin said in a conference call.

Meanwhile, investors including Goldman Sachs, American Express and Allianz of Germany agreed on August 30 to buy a 10% stake in China’s biggest lender, Industrial and Commercial Bank of China, for more than $3 billion. Industrial Bank offers credit cards in China through a joint venture with American Express.

Agricultural Bank of China on August 30 signed an agreement of cooperation with Italian banking group Capitalia.

Swiss bank UBS confirmed in early September that it was in talks to acquire a $500 million stake in Bank of China, the country’s second-largest bank.

China is encouraging its banks to seek partnerships with foreign banks to augment their capital and improve their management skills ahead of initial public offerings. Many of the banks that are taking stakes also agreed to acquire additional shares in the upcoming IPOs.

Bank of China named Goldman Sachs and UBS to handle its $4 billion IPO, which is expected by the middle of next year. BOC International, Bank of China’s investment banking subsidiary, will also be a lead underwriter of the stock offering.

China Construction Bank is expected this month to begin marketing its IPO, which could be China’s largest ever, topping the $5.25 billion listing by China Unicom in 2000.

Bank of America paid $3 billion for a 9% stake in China Construction Bank in June, while Temasek agreed to buy a stake of about 5% for $1 billion and to invest an additional $1.5 billion around the time of the IPO.

China Construction Bank, the country’s second-largest lender, is seeking to hire a new chief risk officer who is proficient in both English and Chinese before it goes ahead with its stock offering. In March, Zhang Enzhao was removed as chairman of the bank for allegedly taking bribes.